How not to handle the economy

The best way to explain the Irish crisis is to explain it in very simple terms.

Suppose the economy is divided in two groups: the haves and the don't-haves. The haves have big bank accounts, shares and other possessions; the don't-haves are dependent on their wages.

Now some big bank goes bust. The consequence is that as a country we are a bit poorer and the question is how this loss should be divided. The logical way to handle this is that the shareholders and the creditors of the bank should carry the burden. So only the haves would pay the bill. They still will be haves but they will just own a little bit less.

But that was not how it worked in the last crisis. Under the excuse that the stability of the financial system was threatened governments took much of the burden upon them. But as the government doesn't own much of itself this means that in the end everybody in the country - both the haves and the don't-haves - will have to pay the bill. But as the don't haves are financially weak and the haves have ways to evade taxes this brings the government soon in a very difficult position.

In Ireland the government had taken full responsibility for a bank that had lent much money to real estate developers and that fell into problems when real estate prices cratered.

Socialists like to scold the capitalist way of thinking as "privatize the profits, socialize the loses" and in this case this is exactly what we have done. The problem is that until we recognize what we have done and that it is unsustainable we will keep running into problems like Ireland has now.

As can be seen in this article ("IMF: Markets Significantly Overestimate Risk of Advanced Econ Default"), the IMF still hasn't gotten the idea when it states that the main problem is "primary fiscal deficit". That is not true. Those deficits are in most cases a direct consequence of governments taking on debts from the private sector.

Governments should not take on any debt from the private sector and if needed pressure for liquidation so that the property relations reflect the economic reality. In times of crisis it needs all the means it has to compensate for falling tax receipts and to stimulate the economy.

A similar reallity rule exists for wages. A country can not live above its means in the long term. This applies also to stimulation of the economy. Stimulation of the economy should concern things that add to the economy like new roads or product development. This disqualifies everything that does not add to the economy: too high wages, new roads that are not needed or bank rescues.